Timing of Plan Contributions

July 15, 2008

The timely remittance of employee-withheld contributions to retirement plans is a top enforcement priority for the Department of Labor (DOL), yet many plan sponsors do not understand when those contributions are due. 

Safe Harbor Myths and Truths

Many employers believe that they are remitting amounts withheld from employee wages on a timely basis as long as those wages are remitted to the plan no later than the 15th business day of the month following the month in which the amounts would otherwise have been paid to the employee.  In fact, the rule is that amounts withheld from employee pay must be remitted to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.  For most employers, this is a very short period of time, perhaps only two or three business days after each payroll period.  Since employers would like certainty that they are transmitting contributions on a timely basis, plan sponsors have been asking for a true safe harbor contribution remittance period. 

In response, the DOL proposed a new regulation that would give small pension and welfare plans (plans with fewer than 100 participants at the beginning of the plan year) a seven-day safe harbor for depositing participant contributions to a plan.  This means that even if a small plan could transmit plan assets to a plan trust sooner than 7 business days, that the DOL will not take the position that the plan assets were transmitted late as long as they are transmitted within 7 business days after the amounts would have been paid to the employee had they not been withheld.  The DOL is also considering a similar safe harbor for large plans, with initial indications that the DOL believes that the large plan safe harbor may be shorter than 7 business days.  But for now, there is no safe harbor for large plans.  The DOL is seeking comments on the appropriate safe harbor period for large plans, so if you believe it should be 7 business days or longer, now is the time to chime in!

Consequences of Error

There are serious consequences for failing to make timely remittances of employee contributions, including prohibited transaction excise taxes and liability for lost earnings on late contributions.  Plan fiduciaries who fail to make remittances of plan assets to a plan also face criminal liability, as illustrated by a recent Fourth Circuit case we will discuss in our next Employee Benefits Alert.

Take Action Now

To avoid civil and criminal penalties, and to reduce the risk of lawsuits and governmental scrutiny, employers should review their existing contribution practices to ensure that employee contributions are deposited to the proper plan as quickly as possible following each pay period.  While the amount of time that is reasonable depends on the facts and circumstances of each individual case, every effort should be made to minimize delay.

If you have any questions regarding this alert or other Employee Benefits Law related issues, please contact one of our Employee Benefits attorneys.